SEC Charges Cannabis Co. with Fraudulent Fundraising

According to a press release issued Tuesday, the Securities and Exchange Commission (SEC) has charged a Canadian cannabis company, CanaFarma, with securities fraud for misrepresentations made in the process of raising funds from investors. According to court filings, these misrepresentations included statements that the company was processing its own hemp, when in fact it was selling finished products that were supplied by a third party.

The SEC action was brought against CanFarma and its cofounders, Vitaly Fargesen and Igor Palatnik. The press release said that parallel criminal actions have been brought against the individuals. While the company is based in Canada, the two individual defendants reside in New Jersey and purchased the company through an alleged strawman.

“As alleged in our complaint, the defendants pitched investors with falsehoods about a fully integrated hemp company with rosy financial projections” said Richard R. Best, Director of the SEC’s New York Regional Office.  “We will relentlessly pursue those who deceive investors and misappropriate and misuse their funds.”

The complaint alleges that the pair represented themselves as vice presidents of the company, when in fact they controlled the entity, and purportedly misappropriated $4 million in funds. They raised $15 million in investments, according to the complaint.

“Defendants provided financial information to investors that misstated historical revenue numbers and included baseless projections about future revenue that were unsupported by the Company’s own internal forecasts,” the complaint said. Other issues included touting the impact of a CEO who held no real authority.

Specific violations alleged by the SEC include breaches of Sections 17(a) and 10(b), as well as a corresponding rule. The agency seeks an injunction, disgorgment of ill-gotten gains, and a ban on the two individual defendants from serving as an officer or director of a company selling securities, and on offering securities themselves.